In hindsight, it seemed like a strikingly inappropriate enterprise to launch in the landlocked Ontario city of Kitchener. But when the local Kitchener-Waterloo Record reported last March that a company called DWS Naval Research and Design Inc. intended to build a $20-million miniature submarine research and manufacturing company, residents of the industrial city of 150,000 welcomed the proposal. Indeed, DWS spokesmen said that when the factory was completed in late 1986, 200 skilled jobs would be created. By 1990 there might be as many as 500 new jobs, a company spokesman had said. For many, it seemed too good to be true—and it was.
Less than a year later, awash in a sea of red ink, DWS has sunk from sight, taking about $1.7 million in Canadian taxpayers’ money with it. Several local businesses that had been swept up in the civic enthusiasm were left holding the bill for thousands more. The Record, the daily newspaper that saluted DWS’s arrival in the city, undertook to chronicle its downfall. A series of stories published late last year by reporters Gregory Hamara and Tom Nunn reveal a bizarre—and serious—abuse of the federal tax system. Moreover, documents obtained by the Record and verified by Maclean's indicate that one employee of the federally supported company was involved in international weapons sales. Another was convicted of cocaine trafficking. Said an aide to Regina New Democrat MP Simon de Jong, who raised the DWS issue in the Commons last week: “It’s one exotic story.”
The promised factory never progressed beyond the company’s glossy brochures. Nor did the submarine, the design of which, Maclean's has learned, was based largely on a German minisubmarine used during the Second World War. But when and if Revenue Canada investigators unravel the tangle of DWS finances, they say they expect to find that at least $1.7 million in federal tax grants was squandered—in part on astronomical hotel bills, luxury cars, a collection of beautiful and expensive mistresses and foreign travel. Said one source close to the company, who doubts that there was ever a serious attempt to go beyond the planning stage: “They were just in it for a good time.”
The good times were apparently financed by part of $2.7 million showered on the company under the now discontinued Scientic Research Tax Credit program. The program—which began in January, 1984, under the former Liberal government and expired 24 months later after a Tory government had taken office—was intended to use tax incentives to stimulate research and development. But from the beginning the project ran wildly beyond its $100-to-$200-million targeted estimates. The final cost: about $3 billion. Finance Minister Michael Wilson ended many of the worst abuses in October, 1984, but the program continued to hemorrhage funds until the end of 1985 because Ottawa allowed firms to participate if research was already under way.
As a result, DWS received its funds about two months after the Conservative moratorium. A letter prepared on Nov. 29, 1984, by the Waterloo, Ont., office of Dunwoody and Co., chartered accountants, to Revenue Canada said that the funds were intended to augment the $13.2 million that the company said it was prepared to spend on research. There is little evidence that DWS conducted any significant submarine research before Revenue Canada officials seized about one million tax dollars remaining in the DWS treasury less than a year later, in October, 1985, effectively closing the company. That action, de Jong said last week, was taken too late. “The government didn’t have the agency in place to supervise these tax credits, so here you have a group of drug runners and arms dealers being able to pull off a scam.” Other critics claim that the rules were so lax that dozens of shell companies across the country siphoned millions of dollars out of the program without doing any legitimate research.
The government’s chances of recovering the missing $1.7 million seem remote. Many of the firm’s principals are living abroad and are out of reach. The company’s chief executive officer and sole owner, Paul Gerhard Hera, a 48-year-old German national wanted for fraud in Cologne, died mysteriously in Kitchener on June 5. His son, 22-year-old Stefan, who worked as a sales agent and draftsman for DWS, was sentenced in Pennsylvania last month for his part in a multimillion-dollar cocaine ring in South America, Canada and the United States. And Lebanese-American Alan Jurdi, a 40-year-old vice-president, has returned to Miami. Company documents show that Jurdi used DWS as a base for attempts to sell fighter jets, missiles and torpedoes to foreign brokers and governments.
The demise of DWS and the apparent death of its president left behind a series of awkward issues that have puzzled agencies ranging from the local Waterloo Regional Police to the RCMP, the FBI and Revenue Canada. Among the unresolved questions:
•Did Paul Hera fake his death? Hera died last June of an apparent heart attack suffered while working at DWS’s suite of offices in Kitchener. After a small funeral, he was buried in a cemetery in Kitchener’s twin city of Waterloo. Later, however, one of the mourners told Waterloo Regional Police that the body buried in Waterloo bore only a marginal likeness to Hera. The same allegation was repeated to Maclean’s last month. The source, who was close to several DWS principals, said that the man in the casket had longer, straighter hair than Hera and his face was thinner. Added the source, who requested anonymity: “If I had to stake my life on this, I would say that it is not Paul Hera.” But a pallbearer at the funeral insisted last week: “I saw him in the coffin. I saw them lower the lid. I saw them put him into the ground—and it was him.”
• Was DWS involved in international arms dealing? Company documents obtained by the Record—and a further investigation by Maclean’s—indicate that Jurdi made several attempts to sell arms. In a confidential memo written in March about a DWS sales trip to Tokyo and Korea, Jurdi recalled telling a Korean general “about the torpedoes and how we would sell them to him unassembled.” And in a handwritten letter dated April 12, 1985, Jurdi offered 65 F86K fighter jets equipped with “rocket launchers and 20-mm cannon” to a London-based security firm for an unspecified price. In addition to $25 million (U.S.) worth of spare parts, Jurdi also offered the London firm, Solus Engineering and Marketing Ltd., 13 F5s, twin-engine supersonic jet fighters. The planes, at $4 million (U.S.) each, were “equipped with sidewinder missile launchers and 20-mm cannon, almost zero hours flying time,” Jurdi wrote.
Yassim Mumtaz, managing director of Solus, confirmed in London last week that Jurdi had attempted to sell him fighter aircraft, although he said he was not certain whether Jurdi was acting on behalf of DWS or for himself. Mumtaz, who described Solus as a security firm involved in “antiterrorism, protection of buildings, VIPs, that sort of thing,” said he declined Jurdi’s offer. He conceded, however, that he had written to Paul Hera on Oct. 29, 1984, expressing interest in a trial purchase of one or two minisubmarines from DWS at a cost of $4.3 million each, with a potential sale of as many as 30 more later. Although the submarines could be fitted with torpedoes, Mumtaz said that his client, an unnamed government, was interested in the units for offshore oil operations. “Personally, I never thought the DWS people were particularly serious,” he told Maclean’s. “They were coming up with all sorts of fantastic claims that were never backed up by any proof.”
At week’s end Maclean’s traced Jurdi, now unemployed, to a modest bungalow in South Miami. According to a source close to the family, Jurdi’s actions at DWS were directed by Hera. In fact, the source said that Jurdi claims to have had no connection with the company’s research and development program. He added that Jurdi also claims that the company owes him back pay.
•Were there links between DWS and an international cocaine-smuggling network? The only certain link is Stefan, Paul Hera’s German-born son. A close friend in Kitchener said that Stefan Hera did little at DWS other than draw fairly credible renderings of minisubmarines that were never built. However, Stefan also was arrested with another German national, Malte Dollinger, and charged with cocaine trafficking. The two men were arrested by FBI agents last Sept. 21 near Williamsport, Pa. Stefan, who later pleaded guilty to his part in distributing 1.5 kilograms of cocaine, was sentenced on Jan. 10 to six months in prison plus two years’ probation. He received a reduced sentence after agreeing to co-operate with U.S. authorities.
•Why were Canadian agencies not suspicious of DWS? A company prospectus, apparently designed for investors and for submission to the Canadian government, notes that in addition to peaceful uses, the submarine had the “ability to carry and use military hardware” and would avoid detection by sonar. Attached biographies of key management—most either Americans or Europeans —were vague. Hera boasted a doctorate in political economics from an unnamed university and work experience in the U.S. department of state and an unidentified United Nations project. Jurdi was described as a “specialist in electronic surveillance equipment, security systems and communications” who “served as a security consultant to several Latin American governments.” And Dr. Mario D’Alerta, a Cuban working in development planning for DWS, listed four advanced degrees, also from unnamed universities.
The Record was unable to verify much of the biographical information. But Ottawa appears to have taken the information at face value. A company letter addressed to Douglas Luery, an industrial training consultant with the Kitchener office of Employment and Immigration, asked him to facilitate the granting of Canadian work permits for at least five foreign nationals “who have an extremely important role in DWS.” Luery quickly complied. Even federal Solicitor General Perrin Beatty, then revenue minister, wrote to Jurdi. Acknowledging DWS’s praise for the “prompt service” with which his department had processed the tax credits, Beatty wrote, “I was glad to know of my department’s co-operation with your firm and I will ensure that the proper people are advised.” Later, Beatty said the letter was little more than a routine acknowledgment.
More than a month after Hera died without a will, leaving the future of DWS uncertain, the Halifax branch of the department of regional industrial expansion wrote to the company in response to a presentation. In that letter, the department expressed interest in another research project, an irrigation system designed for use in developing countries. The letter—written on July 18 to Helmut Altmann-Althausen, an Austrian who served as senior vice-president of DWS—lists a number of potential grants for which DWS might be eligible. “However, if you decide that you wish to locate in Cape Breton, there are further incentives available,” the letter added. “This should be worth exploring.”
How closely Revenue Canada followed DWS’s activities is unclear. Provisions of the Income Tax Act prohibit officials from commenting on specific cases. However, RCMP officials in Kitchener say that they monitored the company for several months prior to its closure. Said Sgt. Ole Rannaoja of the department’s commercial crime unit: “We found people who attracted our interest. And from that point on, these people also attracted the interest of other federal departments.”
Also watching the affairs of DWS with interest was Kitchener business consultant James Diesbourg, who claimed that he conceived the plan for the submarine production company in the early 1980s. The design was based on updated plans used by a one-man minisubmarine manufacturing company, Erich Mylius Co. of Hamburg, West Germany. According to Diesbourg, Mylius was to get a royalty from each submarine. But Mylius told Maclean's: “I’ve never heard of this Hera character. I know nothing about it.” Diesbourg said Paul Hera, who had worked for him several years ago in Puerto Rico, was brought into the project because “he was one of the best lead-in [advance] men I have ever met.” Plans for the project were already under way when the Liberals introduced the research tax credit program. Said Diesbourg: “It just seemed to have been tailor-made to my situation.” Later, about to receive federal financing, the two men had a series of disagreements over funding and Hera’s attempts to sell armed submarines. Finally, Diesbourg said, he agreed to sell the idea to Hera in exchange for being released from about $50,000 in debts and obligations.
After getting Ottawa’s money, Hera and other DWS players block-booked suites at the Valhalla Inn, a downtown Kitchener hotel. There, they spent lavishly in bars and restaurants and were known to tip as much as $50 to waiters assigned to deliver champagne to a seemingly endless round of late-night parties. Often, the good times were shared with a group of women, alleged clients and other followers, sources said. Monthly hotel tabs ran as high as $15,000. Said hotel general manager Edward Meijer: “There was this mystique and the federal government was bankrolling them. It was all cloak-and-dagger stuff. They were telling staff some very romantic stories about what they were doing.”
At least two area businessmen acknowledge that they were deceived by DWS’s air of legitimacy. An employee of a Waterloo car rental agency, who requested anonymity, said that his company was left with a useless leasing contract worth about $150,000 for several luxury cars acquired for DWS use. And David Horst, president of Incom Construction Co. Ltd. of Kitchener, invested more, purchasing a 12-acre site on behalf of DWS. His company even drafted plans for a factory that included a deep-water test pool and a helicopter pad. Said Horst: “We would assume, like anyone else would, that these programs are fairly well investigated.”